New Pressure on the EUR/USD, as EZ Concerns Return

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Market Drivers for April 12, 2013
USD/JPY breaks down below 99.00 on profit taking driving risk lower
Euro drops through 1.3050 on news that Cyprus aid limited to 10B
Europe -1.15% Asia -0.47%
Oil $92.48
Gold $1545

Europe and Asia:
JPY Tertiary Industry 1.1% vs. 0.8%
EUR Euro-Zone Industrial Production 0.4% vs. 0.3%

North America:
USD PPI 8:30
USD Advance Retail Sales 8:30
USD U. of Michigan Confidence 9:55
USD Business Inventories 10:00

Risk aversion accelerated in early European trade taking USD/JPY below the 99.00 level and pushing EUR/USD through 1.3050 support as profit taking and renewed concerns about Cyprus weighed on investor sentiment on the last trading day of the week.

In Japan USD/JPY once again failed to take out the century mark as comments by BOJ chief Kuroda that he is watching the long end of the yield curve spooked the market. As a result of BOJ extremely aggressive QE plans the yields on the intermediate and long dated JGBs have been extremely volatile this week creating moves not seen in years. Mr. Kuroda is clearly concerned that this instability could accelerate and his comments suggest that the BOJ may become more cautious in their implementation of the non conventional monetary policy measure in order to calm the fixed income markets.

The news took the steam out of the USD/JPY rally and after the pair drifted below the 99.50 mark it quickly tumbled through 99.00 as profit taking kicked in. The pair has now failed three times to clear the 100.00 level and may now turn down to fill its opening week gap at 98.00 if longs continue to liquidate ahead of the weekend. The eco calendar today carries US Retail Sales which are expected to contract by -0.1% versus 1.0% gain the month prior.

If the US data proves as dour as the market expects or misses estimates even more, the downside pressure on USD/JPY could accelerate. For now the pair continues to find support near the 99.00 level but the longer it stays away from the 100.00 mark the more likely the prospect of a near term top and a further correction towards the 98.00 level.

Meanwhile the slide in the yen crosses also affected the EUR/USD which drifted back to 1.3050 as the unit was driven lower not only on profit taking flows but also on the news that the Eco Fin ministers capped their bailout aid to Cyprus to 10 Billion euros. Although Cyprus has been off the radar for the past week, the market continues to be concerned about the fallout from the bank rescue deal there.

The EUR/USD has staged an impressive comeback rally to trade back to its gap highs near 1.3100 level this week, but it has stalled at the figure for several days and today’s news on Cyprus may reawaken some of the risk aversion fears that surround the currency. One key signal of stress is that the EURCHF pair, after rising to 1.2200 is once again trading near the 1.2150 level. Despite the relief rally this week and the boost from the carry trade flows, the problems in the EZ remain and as focus returns back to those issues the EURUSD may come under fresh selling pressure once again.

Boris Schlossberg
Managing Director

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